As we promised last week, we have the Q2’08 fiscal numbers
for AMD which came out yesterday. And for the sake of completeness we also have
Intel, whose numbers came out earlier this week. We’ll start with AMD.

AMD:

So much for only losing $200 million this quarter. At face
value, AMD lost $1.19 billion this
quarter, on revenue of $1.35 billion. The biggest loss (and biggest change)
since last week was that for the second time AMD has taken a write-down on ATI,
this time to the tune of $876 million. In the present-term this is a correction
of the value of ATI within AMD’s books, but it’s also ongoing proof that AMD
paid too much for ATI. The bit of good news here is that write-offs are not the
same thing as actually losing money (even though they are calculated against
net income), so AMD isn’t $1.19 billion poorer (not that they could afford to
be). Real (operating) losses are around $275 million before factoring in AMD’s
one-time sale of old 200mm manufacturing equipment, after which operating losses
drop to $143 million, a far more minor hit against what cash AMD still has. Furthermore
this means losses are reduced compared to Q2 of last year, a positive sign for
the company.

As for a breakdown on what came from where, computing
solutions (CPU, chipset, etc) was $1.1 billion, while graphics (GPU) was
another $248 million. CPU sales compared to last quarter are down as is
traditional for this time of year, however the average selling price is also
down, which is a bit troubling. AMD’s inability to capture high-priced (read:
high-profit) sales is continuing to hurt the company. GPU sales were not a smash hit either, in
spite of the fact that RV770 started shipping last quarter. The Radeon HD4850
was not available until late in the quarter, and the HD4870 effectively missed
the quarter entirely, so AMD’s top product was only a $200 part. This means
that the average selling price for GPUs was only flat compared to last quarter.
With a full quarter of HD4000 sales coming up (including the lucrative HD4870
X2) we’d count on this improving.

AMD has stated that they are hoping to return to
profitability in the second half of this year, although we wouldn’t hedge and
significant bets on it. AMD’s own predictions for Q3 are to lose around $180
million, so a return to profitability would not be until the 4th
quarter. This is timed with the launch of their 45nm parts, or in other words
the company is counting on Shanghai and its related parts to hit the right
balance of revenue and cost to make the company profitable again. This quarter
marked the 7th consecutive loss for AMD, and the next quarter will
make for 2 whole years of losses with loss number 8. There’s a lot of
speculation on if AMD will need to sell some further assets (equipment, a
business division, etc) to make it there, but we’ll see.

Finally in a bit of unexpected news, CEO Hector Ruiz was
given the boot. Hector has been fairly unpopular with the press, the public,
and investors, so this is good news for the company for at least today. Hector has
been blamed for much of AMD’s recent woes since he has been its overseer
throughout the entire decline of the company, although he has probably taken on
more blame than he deserves. The enigmatic Jerry Sanders is a hard act to
follow no matter the situation.

Hector’s replacement is Dirk Meyer, AMD’s current president
and COO. Dirk is seen as more of a technical man and less of a business man
than Hector, which may be what the company needs right now. He’s credited with
the success of AMD’s earlier Athlon processors, and interestingly has been with
AMD several years longer than Hector has. The change in CEOs likely won’t affect
anything in the short-term, but it remains to be seen just how differently Dirk
will run things in the long-term; there’s the potential for some big changes.
In the mean time he’s going to have to face the tough job of keeping AMD from
losing any more money.

Intel:

Meanwhile, Intel has had a fantastic second quarter. Revenue
was $9.5 billion with a net income of $1.6 billion. This makes for a record 2nd
quarter in revenue for the company, along with a surprising 25% jump in profit.
This is very much a case of Intel doing well when AMD is suffering, not only
are they capturing a larger share of the market, but AMD isn’t able to drive
down the prices on their consumer products positioned above the Q6600, or roughly
$250. The only thing Intel continues to face stiff competition with is the 4P+ server space, where AMD is still hanging in with the Opteron and
its HyperTransport bus.

Besides the above, this quarter makes for a fairly dull
earnings report. Intel’s biggest problem is that their own low-end parts are
eating in to the sales of their high-end parts. The average selling price for
Intel’s processors is down slightly, which Intel credits to very strong sales
of cheap laptops. They are not very clear on if “cheap laptops” are the new
generation bottom-bin products like the eeePC, or just growth in the
traditional cheap laptop market.

Finally, the European Union has no problem raining on what’s
otherwise Intel’s parade at the moment. It’s looking increasingly likely that
Intel will be found guilty of antitrust charges that were started early this
decade from AMD. The EU is adding to its list of charges a claim that Intel paid
a EU retailer (through rebates) to not carry AMD products, and a claim that
Intel paid a manufacturer to delay launching a line of computers using AMD
CPUs. Intel of course is not happy about the latest charges, and there is some
continuing concern from outsiders that the entire situation is being unfairly
influenced due to AMD’s fabs being located within Germany. It is anyone’s guess
when the EU will wrap this case up though; it has gone on for 8 years now with
no indication that it’s coming to an end.

This is not because AMD is having trouble competing now - it is because AMD had trouble competing even when they had a vastly superior product. During that time, Intel kept AMD from even being a supplier to some of the world's largest computer makers. They did this by manipulating prices in their 80% share so that AMD would effectively need to charge less than zero for their processors. AMD even tried to give away processors to HP - and HP, because of agreements with Intel, could not take all of them.

Here's the math: Suppose you need 1million processors. AMD's are priced at $80 each. Intel's (at the time, slower) are priced at $100 each. But AMD, is unable to supply more than 50% of your required processors - so you are forced to deal with Intel. Now, Intel offers either 800,000 processors at $100 each.. or 900,000 processors at $90 each or 1,000,000 processors at $80 each. In this situation - that actually did happen while AMD had the better processor - AMD cannot compete at any price.

Now, Intel fanboys say there is no merit to AMD's claims and say AMD simply cannot compete - even though for nearly four years, AMD crushed Intel in processor performance. If AMD was allowed to compete fairly, AMD would have had a LOT more money to continue putting into R&D - and maybe their processors today would still be crushing Intel.

In this duopoly, it is clear that Intel was monopolistic when it could not beat AMD in performance.

Oh ya.. for the Core today, Intel had to take massive losses to put billions of dollars into R&D - something AMD cannot afford to do now.
Reply

"there is some continuing concern from outsiders that the entire situation is being unfairly influenced due to AMD’s fabs being located within Germany"

While that can't be proven either way, the fact that Korea, Japan, New York, and the FTC have all either accused Intel of the same thing the EU has, or are investigating them for it, tends to give the impression that it's probably not a biased prosecution. Reply

You paint a better picture for AMD because you don't understand how the $143 mil operating loss is calculated. If you have a chance to read through the transcript available at Seekingalpha.com, you will see their gross margin is inflated from 38% to 52% due to one time incoming from the sale of some 200 mm tools. Their actual operating loss is much higher than your number,

some quotes from AMD's CFO:
"Losses from continuing operations were $269 million or $0.44 per share which included a net favorable impact of $97 million or $0.16 per share. This favorable impact consists of a gain of $193 million from the sale of 200 mm Tools partially offset by $96 million in charges. Our loss from discontinued operations was $920 million or $1.52 per share. This was largely made up of non-cash goodwill and intangible asset impairment charges of $876 million.

Reported second quarter operating loss is $143 million but on a non-GAAP basis was $276 million compared with $185 million last quarter. For comparability I have excluded the Tool sales, arc and restructuring charges as are outlined on the table in our press release.

Gross margin in the quarter was 52% including a 14 percentage point positive impact associated with the sale of 200 mm Equipment. Therefore gross margin was 37% compared with 41% in the prior quarter. This decline was due to lower unit volumes and ASP’s and changes in product mix as we sold older generation products to make way for our new offerings.

Now switching to the business segments. Computing solutions revenue was $1.1 billion in the second quarter, down 8% from the prior quarter and flat compared to the same period a year ago primarily due to weaker sales. The server business saw 5% unit growth over the prior quarter and a 19% increase over the same period a year ago, a positive sign in light of the recently launched OEM products. Quad-Core and Triple Core processor shipments were up significantly while microprocessor ASPs were down. The result of sales of older generation products.

Operating loss for the computing solutions group was $9 million; however this includes a $192 million gain from 200 mm Tool sales. In the graphics segment which now includes game console royalties revenue for the quarter was $248 million, down 5% sequentially and up 18% year-over-year. Operating loss for the graphics segment was $38 million in a very competitive pricing environment particularly on our older generation products. However, our new highly acclaimed HD4800 series has been well received in the market since its launch in late June" Reply

"Reported second quarter operating loss is $143 million but on a non-GAAP basis was $276 million compared with $185 million last quarter. For comparability I have excluded the Tool sales, arc and restructuring charges as are outlined on the table in our press release."

I must agree and support what Tinyfusion has said here.

Here is a useful definition of Operating profit

"Income or loss before taxes and extraordinary items resulting from transactions other than those in the normal course of business."

Clearly, the sale of equipment and the impairment of goodwill associated with the purchase of ATI are NOT part of AMD's normal course of business. (I suppose that actually depends on who you're asking, but in terms of accounting standards anyway.)

In other words, they can't keep selling fab equipment because they only have so much to sell. And including the sale of such equipment, and any other one time transactions in operating profit/loss will give you a figure which does not reflect the performance of the company with respect of its normal operations, ie selling chips. And that is the crux of it. Performance is down on Q2 last year, and down on forecasts. Neither are good things. Spinning it any other way is just that, spin. Reply

I love AMD, call me a fanboy if you wish. I tend to root for the underdog (ATi, AMD) So Intel's troubles come across as good news to me. AMD makes good processors, the majority of the population would be plenty happy with an Athlon64 X2 or a Phenom X3 in their desktop PC. My next computer (currently running an old 3Ghz Pentium 4 Prescott 2M due to funds or lack therof-) will likely feature a Athlon64 X2 +5000 or a Phenom X3 8450. I sure hope Anand is right and AMD will be profitable by the 4th quarter. I dont know how much longer can survive losing money like this. No competition for Intel is NOT a good thing, no matter what the fanboys say. When intel has no competitor, why should they spend money on R&D to improve when they could just use what they have now when it works just fine. Not good at all. Reply

Yes, but not any time soon. Intel first needs to be found guilty before AMD can start suing them for anything, and I'm not immediately sure what AMD would sue them on. My understanding of EU laws isn't great, but I don't believe any of the money from their fines goes to the harmed companies. Reply